This is a study on organizational knowledge and capacity, with a particular focus on how learning takes place and how capacity can be developed to improve public service organizations. It has wider implications for how we think about learning in all types of organization.\ud \ud The study adds theoretically and empirically to the limited literature that addresses organizational capacity in public organizations. It examines explanations of capacity that may be associated with better performing local authorities and organizational sharing of knowledge and service improvement.\ud \ud The research design and methodology incorporate a conceptual framework and an empirical measurement instrument designed to investigate factors that explain organizational capacity. A longitudinal, quantitative survey of the population level of all 388 English local authorities examined comparisons of organizational capacity between better performing and lower performing councils.\ud \ud The findings provide empirical evidence of the relationship between better performing organizations and greater organizational capacity. Those organizations with greater capacity for learning can draw on prior knowledge to increase their current capacity. Capacity contributes to explanations of the relationship between an organization’s particular environment, and utilization of its internal potential, including organizational knowledge, for future performance.\ud \ud The study concludes with a reformulated definition of organizational capacity. It also finds that capacity building derives from different perspectives and is conceptually different from organizational capacity. It draws attention to the importance of context for organizational studies, and calls for definitions and operational measures that are suitable for all sectors.